Not dollar, not euro, but gold

As the US dollar's value continues to drop, China looks to invest in gold for stability.

Shops are closing in the centre of Venice, Italy, as the eurozone finance crisis spreads and economists warn that state bankruptcy would endanger the stability of the euro and have dire global consequences [GALLO/GETTY]

Growing concerns about the slow death of the dollar rather than a saviour's goodwill are underpinning China's widely publicised purchases of European government debt, according to experts. But as the Eurozone debt crisis spreads from Greece and Portugal to countries like Italy and threatens the very survival of the euro, China's finance mandarins and keepers of the country's 3 trillion dollars foreign reserves are looking yet again at gold as the anchor of stability.

Yu Yongding, a former adviser to the Central Bank of China and strong critic of US treasury bonds, an asset in which about 1.2 trillion dollars of China's foreign reserves are invested, has been calling on Chinese rulers to diversify as much as possible of China's holdings to guard against a weaker dollar.

Speaking at a global economic forum in Beijing this month Yu said the US debt and its ratio against the country GDP were rising, and predicted trouble for all US assets and the global economy.

Yu is in company of big banks like Goldman Sachs predicting a slow and steady decline of the dollar. Yu believes that from 1929 to 2009 the purchasing power of the greenback has declined by 94 percent. Goldman Sachs forecasts it will lose 15 percent of its value against the British pound over the next 12 months alone.

Investors all over the world have begun moving their cash reserves into other currencies to cut exposure to the US dollar in the belief it will continue losing in value.

US President Barack Obama had to step out last week and defend the debt-ridden US economy, insisting the country was not in the same dire straits as "Greece or Portugal". With Standard & Poor's and Moody's, two major ratings agencies, threatening to downgrade US top credit status, fears are growing whether the country can continue paying interest to its creditors, principally the Chinese.

With the dollar slowly going out of fashion, China has in the last three years turned its attention to the euro - another beleaguered pillar of the international monetary system. Last year Beijing helped stave off a full-blown euro debt crisis by buying Greek bonds in return for a 35-year lease on Piraeus harbour in Athens. It later bought 1.4 billion dollars of Spanish bonds, giving a boost to market sentiment about Spain.

During Chinese premier Wen Jiabao's visit to three European countries last month, reports emerged that Beijing has shown keen interest in buying a stake in the EU's euro bail-out fund. China's largesse towards Europe has prompted the European Council on Foreign Relations, an influential think tank, to warn that China's "scramble for Europe is damaging the EU's interests", threatening to compromise EU values in return for investments.

Going for the gold

Some Chinese experts, though, see investing in European government debt as a necessary risk. "Saving Europe with money is not at all a bad thing," Ming Jinwei, a financial affairs commentator wrote in the Economic Observer.

"America's credit ratings and the depreciation of the dollar can no longer be ignored. By getting closer to Europe China is taking a step forward in liberating itself and the global financial system from dependency on the US and the US dollar," Ming argued.

While Beijing has never been shy about its desire to have the Chinese yuan eventually replace the greenback as the global currency for trade, its efforts to expand the yuan's sphere of influence have actually been producing the opposite effect of late.

China's efforts to make the yuan the international currency have continued apace with Beijing signing more and more members into the renminbi trading club.

Over the past two years Brazil and China have organised several currency swaps between their central banks to allow trade to be conducted without the dollar. Similar deals have been agreed with India, Argentina, Russia, South Africa and a host of other countries. In the first quarter of this year about 7 percent of China's trade was settled in its own currency, a 20-fold rise from a year earlier.

But rather than reduce China's dependence on the dollar, the rapid yuan internationalisation is actually having an opposite impact, according to Yu Yongding. In their belief that the yuan is set to appreciate, people outside of China are keen to accept yuan payments while at the same time being reluctant to pay for goods with yuan. The process is causing China to pay for more and more imports in yuan, leaving it saddled with a growing pile of foreign currency.

In June Xia Bin, an adviser to China's Central Bank said the country's reserve strategy needed an "urgent" overhaul. Instead of buying government debt from the West, China should invest in strategic assets and accumulate gold by "buying the dips", he was quoted as saying. So far Beijing has admitted to have doubled its gold reserves to 1,054 tonnes or 54 billion dollars, and said it has plans to raise it to 8,000 tonnes.

A version of this article first appeared on the Inter Press Service News Agency.

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